Investing in Cineworld

I see a lot of talk of investors buying shares in Cineworld on social media. And I ask myself why? From a day trading point of view it’s probably an interesting share given it can be volatile, but from any other perspective it’s a poor investment.

Cineworld share price chart
Cineworld 10-year share price chart

What makes Cineworld a bad share to buy?

Cineworld shares have fallen about 80% in just the last year. Yes, they’ve been hit hard by covid-19 but the problems at the company precede the pandemic. It’s just they’ve been made much worse by closed cinemas, an economic slowdown and social distancing. Even before covid-19 analysts worried about debt, the massive acquisitions the group makes and the effect that has on the stretched balance sheet.

Cineworld may be the world’s second-largest cinema chain, but for me in this instance, scale doesn’t provide the benefits for investors that it usually would. By expanding the balance sheet now looks weak. Based on figures from the last annual report the current ratio is only 0.3. This to me suggests the company is in significant financial trouble. Cash also plummeted between 2018 and 2019 giving Cineworld less leeway in the current difficult environment. In a difficult trading period like this the phrase ‘cash is king’ becomes truer than ever.

On top of this, it’s expansion has now landed it with potentially very expensive legal battles. It’s ill-timed pursuit of Canadian operator Cineplex for $2.1bn – which it is now trying to extricate itself from – has landed it in hot water. Both sides are now suing each other over the abandoned takeover. Cineplex has called Cineworld’s actions as a case of buyer’s remorse.

The move by Universal Studios to start releasing films direct to streaming along with a more general changing of the exclusivity periods cinemas have on new films are all industry-wide challenges. This couldn’t come at a worse time though for Cineworld. It further helps dampen investor sentiment.

Another issue is that the ‘smart money’ is shorting the shares, ie betting they will go down. Cineworld is the second most shorted UK share according to ShortTracker. Generally, I’m disinclined to go against hedge funds. Some might have been burnt on Tesla for example, but where Cineworld is concerned I think they’re probably onto something and know there is money to be made in betting the shares will fall.

Investing in the shares to me seems like it’s a hope that Cineworld gets taken over rather than collapses. For me this is a gamble. I’d prefer to invest in a solid company for the long term, operating in a market not facing huge difficulties.

Remember just because a share price is much cheaper than it was, doesn’t mean it’s good value. I don’t see any reason to invest in Cineworld shares. The only way I see to make money on the company is to short it, or to day trade the shares – both of which are too risky for me and outside my area of expertise. For income investors, and even for value investors, there’s nothing attractive about buying the shares.

Are there better competitors?

Everyman Media Group is far smaller, but it is a direct competitor as it owns cinemas. The market capitalisation of the group is under £100m. It runs 33 cinemas and operates at the premium end of the market. Perhaps not where you want to be in a recession arguably.

It too has a stretched balance sheet although to a lesser degree. Its current ratio based on the latest annual report is 0.54. Liquidity will have worsened since then though, for the same reasons as Cineworld.

A crumb of comfort might be that at least Everyman was performing well before the pandemic. It delivered 47% revenue growth in the first two months of the year. But investors can’t ignore the reality now. The only real hope for a meaningful recovery in the share price is for the pandemic to be subdued and for social distancing measures to be relaxed and then as a knock-on effect consumer confidence to return.

Overall, I’d stay away from cinema companies as they are essentially a punt on what happens next with covid-19 and there are wider structural issues as well within the sector. Especially as pointed out before their relationships with the big film studios. If you for some reason really want to own a cinema owner than I’d suggest Everyman over Cineworld but at the end of the day neither are good investments in my view.

Are there better opportunities in the leisure sector?

Hollywood Bowl could be a better investment. Its fundamentals, as I calculated them before the pandemic, were strong. I also think the company had room to grow. That’s less clear now, as the focus must be on survival and getting its existing centres up and running, but there may be opportunities to expand as rivals collapse. As one of the bigger players – along with Ten Entertainment – in a fragmented market it could have the firepower to pick up assets on the cheap once conditions normalise, if and when that happens.

Overall, I think bowling alleys might bounce back more than cinemas and other forms of leisure. The company’s centres in England have been reopened with social distancing in place and in Scotland are due to reopen from the 24th August. The market for bowling is growing and so it doesn’t face many of the specific challenges which cinemas face.

So if I was to invest in the leisure sector I think Hollywood Bowl shares would be my pick. Again though the share price comes with covid risks. Any share in the leisure sector will once again take the brunt of any further lockdowns.  

I don’t own shares in any company mentioned.

If you like this article please do share on social media and you can also read my most recent article on whether FTSE 100 bosses are overpaid here.

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